Market Drivers Mar. 23, 2016
Gold drops on stop running in Tokyo
Fed’s Harker – need to get on with rate hikes
Nikkei -0.28% Dax 0.87%
Europe and Asia:
USD New Home Sales 10:00
With eco calendar barren in both Asian and European session trade there was little fresh news flow to move FX around, but the the dollar still found a bid rallying against euro, cable and yen while commodity currencies sold off on weakness in gold.
Cable continued to sell off with the pair testing the 1.4150 level in morning London dealing after mayor Boris Johnson stated that bankers have told him that Brexit would not hurt the finance sector. Mr. Johnson is one of the leading figures now in the Leave campaign which has been making the case that UK could still remain the financial hub of Europe even if UK leaves the EU.
In fact some analysts speculated that the proposed LSE/Deutsche Bourse deal may in fact be a preventative move to allay fears of UK companies being shut out of the EU capital markets.
Still despite the assurances from the Leave campaign it’s hard to imagine that financial sector will remain in tact if UK does indeed vote to Leave the EU. The markets certainly appear worried as 3 month volatility in GBP options which would expire after the referendum vote is taken are now at their highest levels since 2010. London bookies have tightened their odds of Brexit to between 35-40% though they still remain well below the even money mark.
Meanwhile the Aussie also took a hit today as gold slid more than 1% in Asian session trade. There was no specific reason for the decline aside from a case of stop running, but in absence of any other news the Aussie reversed its earlier gains and fell below the .7600 mark.
One reason for the decline in gold may be the rise in US yields which have now rallied to 1.95% on the benchmark 10 year bond. The rise in bond yields which are up more than 10bp since last week is also helping USD/JPY which rallied to a high of 112.75 by midmorning European dealing. After yesterday’s risk aversion sell off caused by the terror incidents in Belgium, the pair has rallied smartly and could make a run for the 113.00 figure during US session trade.
In North America the calendar is also quiet with only New Home Sales on the docket so FX action will likely be driven by macro factors from equity and fixed income markets as well as the oil inventory numbers which could have an impact on crude. For now the greenback remains bid and if rates prove supportive is likely to extend its rally as the day proceeds.